Question

a) Alternative forms of economic organization include spot markets, long-term contracts and vertical integration. Describe their main characteristics. Provide practical examples of the three forms of economic organization.

b) What is the main advantage of spot markets over vertical integration?

c) What should firms do in order to protect and preserve “relational rents”? Provide an example.

d) In what way can mobility barriers and opportunism constrain the possibility of achieving sustainable competitive advantage through relations to other firms?

e) What is the main reason for vertical integration?

Answer 1

Spot market also called as cash market is a public financial market in which the commodities and financial instruments are traded for immediate delivery. This is in stark contrast to the futures market in which delivery is due at a later date.

Long term contract is a contract which is more than five years in period. It is mostly a contract to perform work for another over a prolonged period of time. Eg Construction of a bridge or highway.

Vertical integration is a strategy adopted by the companies that expands its business operations into different steps on the similar production path like for example when a manufacturer owns its supplier or distributor. This can help in plummeting expenses and improve efficiency by way of decreasing transportation expenses and reducing turnaround time. Nevertheless sometimes it is more effective to depend on established expertise and on the economies of scale of the other vendors.